STORIES

Urban Evolution - HBS Research on the Inner City

After decades of decline, despair, and neglect, the
last ten years have brought some preliminary signs of revitalization
to a number of inner-city neighborhoods in the United States.
Blighted areas such as Chicago's North Side, New York's
South Bronx, South Central Los Angeles, and Houston's Fifth
Ward - once synonymous with out-of-control crime rates, gang
warfare, antiquated public housing, crumbling schools, and degrading
poverty - have begun to show indications that there may be
a way out of the hopeless downward spiral.

In their 2000 book Comeback Cities: A Blueprint
for Urban Neighborhood Revival, former HBS senior lecturer
Paul S. Grogan, who also served as Harvard's vice president
for Government, Community, and Public Affairs, and coauthor Tony
Proscio point to four encouraging trends that give cause for guarded
optimism: the maturation and expansion of a large network of grassroots
community organizations; the increasing tendency of businesses,
large and small, to identify the inner city as an untapped market;
a drop in urban crime rates; and the "unshackling" of
inner cities from the entrenched and outmoded bureaucracies that
have long governed welfare, public education, and public housing.
Although heartening, Grogan and Proscio admit that these positive
trends are fragile first steps and "entirely reversible,
if treated with indifference." "The point is not that
poverty has been abolished, or will be," they note, "nor
is it that cities can or should return to the full glory of their
wealthier pasts. The point is that they are becoming places where
people want to live, shop, run businesses, and go to school."

At HBS, a number of faculty are engaged in research
and teaching projects that treat these recent developments in
urban areas with anything but indifference. Whether they are helping
inner cities capitalize on their inherent competitive advantages,
working to make assetbuilding financial services available to
low-income families, analyzing the benefits of welfare-to-work
programs, or inspiring MBAs to forge strategic partnerships that
will benefit both communities and businesses in the coming decades,
HBS professors are making a significant contribution to the urban
recovery movement.

Building
Sustainable Communities

Many approaches to revitalizing the inner city have focused on the social problems, but the more fundamental issues are often economic. - Michael Porter

"Many approaches to revitalizing the inner city
have focused on the social problems, but the more fundamental
issues are often economic," notes HBS professor Michael E.
Porter, a world-renowned strategy and competitiveness scholar
who began to apply his expertise to help improve inner cities
a decade ago. In the early 1990s, with support from then HBS Dean
John H. McArthur, Porter oversaw a series of field studies that
looked at potential solutions to the problems facing America's
inner cities. This research inspired Porter to publish a number
of articles on the topic and, in 1994, to found the Initiative
for a Competitive Inner City (ICIC), a nonprofit organization
that aims to catalyze innercity business development across the
United States.

In frequent talks around the country, Porter emphasizes that while
programs that alleviate some of the social problems of the
inner city (lack of health care and substandard housing, for example)
are important, they do not get at all the root causes.
"To build healthy and sustainable inner-city communities,
it is necessary to create healthy economies in and near the
communities themselves," says Porter.

Two examples of successful investment in the inner
city that Porter has written about are Sprint and Walgreens. In
Missouri, Sprint decided to locate a new call center in a struggling
section of downtown Kansas City and provide job training for nearby
residents. The new urban facility was pleasantly overwhelmed with
applications and now employs local residents, many of whom walk
to work, with much less turnover than Sprint's suburban call
centers. "They took a risk, but it paid off - they now
have a solid pool of workers who are very happy to have good jobs
in their own neighborhood," says Porter. Walgreens has made
a concerted effort to locate more stores in urban areas where
residents do not have access to large drugstores, recognizing
a considerable, underserved market that has been documented in
ICIC research. City dwellers are now taking advantage of the chain's
employment opportunities as well as its discount prices and large
selection of merchandise.

As Sprint and Walgreens have shown, Porter notes, companies that
invest in the inner city and entrepreneurs who start
businesses there are well positioned to take advantage of a growing,
local labor pool; the efficiencies of a central location
with access to other business and transportation infrastructures;
and the unmet needs of eight million households (with $100
billion in retail demand). Businesses can and do thrive in these
regions that have often been misconstrued as bad for
business. "Economic development in inner cities must be approached
from the perspective of competitiveness, and it must be
based on business opportunities in the inner city that are genuinely
profitable," observes Porter, who was named Bishop
William Lawrence University Professor last year, becoming only
the fourth HBS faculty member to attain Harvard's highest
academic rank.

With Porter as its chairman and CEO, the ICIC has
a mission to "spark new thinking about the business potential
of inner cities, thereby creating jobs and wealth for inner-city
residents." The many programs that the initiative runs include
a city advisory practice -that works with several metropolitan
areas, including Boston, Hartford, Kansas City, Milwaukee, and
St. Louis - and a $130 million private equity fund to make
capital available to inner-city companies. Each year, the initiative
partners with Inc magazine to publish the Inner City 100,
a list of the 100 fastest-growing urban businesses.

This year, the ICIC and the School's Executive Education
Owner-Managed Programs will offer a special one-week general
management seminar for the IC 100 CEOs. "If we can get companies
like these growing in America's inner cities, jobs, income,
and wealth will follow," says Porter, who will teach in the
program that is designed to provide the necessary tools to CEOs
of rapidly growing companies. "Urban areas are becoming a
new arena for innovation, transformation, and growth in our
economy. The business community in America can do something positive
about inequality. We are hoping to engage more and more
companies and alumni in bringing the power of the market system
to the inner city."

Partnering
for Success

A small number of key business leaders can make a big difference by leveraging their leadership. - James Austin

HBS professor James E. Austin, a thirty-year resident
of Boston's inner-city Dorchester neighborhood, has long
been interested in the revitalization of urban areas. "I
have personally witnessed the challenges and opportunities embedded
in our urban communities," notes Austin, who has studied
extensively the role that business can play in such areas. "The
corrosive effects of urban decay have pushed many cities into
a devastating downward slide. Unless business leaders are centrally
involved in generating solutions to the pressing urban problems,
there will be no lasting solutions." Austin, the John G.
McLean Professor of Business Administration, chairs the School's
Initiative on Social Enterprise, teaches the MBA elective Entrepreneurship
in the Social Sector, and is the author of numerous articles and
cases on the subject. Stressing the power and importance of a
multifaceted approach to renewal, Austin has studied business
leadership coalitions (BLCs) in Cleveland, New York, Atlanta,
Minnesota, Detroit, Boston, and Pittsburgh.

"A small number of key business leaders can make a big difference
by leveraging their leadership," observes Austin. He points
to Cleveland Tomorrow, the organization formed after Cleveland
declared bankruptcy in 1978 that played a key role in
transforming the city into a repeat winner of the National League
of Cities' All- America City Award. The group was
successful, Austin asserts, because it took the time to diagnose
the city's problems carefully and delineate solutions. The
organization also decided early on to be a catalyst and facilitator
of change rather than actually providing programs.
Working in partnership with city, county, state, and federal government
officials and a multitude of leaders from the civic
sector, Cleveland Tomorrow has been involved in building a sports
complex and a science museum, renovating the theater
district, cleaning up the waterfront area, restoring the city's
NFL franchise, securing the rights to house the Rock and Roll
Hall of Fame and Museum, and developing affordable neighborhood
housing.

"The complexity and tenacity of the problems afflicting a
city require a high capability for analyzing problems, delineating
strategies, and ensuring implementation," says Austin. "These
problems require an understanding of economic development and
the capacity to mobilize and effectively deploy resources. They
require entrepreneurial thinking and action, which are
precisely the talents of business leaders." In addition,
he adds, the benefits to businesses that get involved in their
own
cities are high: healthy communities boost competitive advantage,
community service makes better leaders, and the common
interests of business can be leveraged through collaboration.

While business is key to the successful revitalization of urban
areas, Austin notes that other alliances are also important.
He sees a future in which leaders from all sectors build relationships
that will improve the social and economic conditions
in which inner-city residents live and work. "Cross-sector
partnering between business, government, and nonprofit sectors
will be the collaboration paradigm of the 21st century,"
he asserts.

Teaching
Millions

One customer with a $500 savings account is not very interesting, but twenty thousand investors with $500 each can open a lot of doors. - Peter Tufano

"Most of us spend the lion's share of our careers teaching
thousands of people the way to earn millions of dollars,"
observes
Peter Tufano, the Sylvan C. Coleman Professor of Financial Management
and chair of the Finance unit at HBS. Although his
primary research, which focuses on financial innovation and the
use of financial engineering techniques by corporations, may
fit this general description, for some time now Tufano has also
been involved in a very different project aimed at "trying
to
teach millions of people how to earn thousands of dollars."

In the mid-1990s, Larry Fondation, a community organizer
in South Central Los Angeles and Tufano's Harvard College
roommate, alerted Tufano to the plight of low-income wage earners
who traditionally have been left out of the loop when it comes
to access to financial services. "There are a lot of check-cashing
services, pawn shops, and payment and loan services in neighborhoods
like South Central LA," Tufano notes, "but very few
institutions that would help people accumulate savings."
A 1999 Harvard Business Review article cowritten by Tufano,
Fondation, and Patricia Walker revealed that South Central had
only seventeen depository institutions to serve more than 600,000
residents. In that article, "Collaborating with Congregations:
Opportunities for Financial Services in the Inner City,"
the authors argued that inner-city populations become more attractive
to financial institutions as potential customers when they are
grouped together under the umbrella of community organizations
such as churches. "One customer with a $500 savings account
is not very interesting to a financial-services firm," Tufano
observes, "but twenty thousand investors with $500 each can
open a lot of doors."

Tufano quickly became interested in not only studying the phenomenon
but in "actually trying to make something happen." Aided
by the groundwork of a number of enthusiastic HBS social enterprise
field-study teams, in 2001 Tufano launched the D2D Fund,
Inc., a nonprofit company that is creating partnerships between
government, large financial institutions, and community-based
organizations to encourage asset building. Located in Boston's
inner-city Roxbury neighborhood, the firm, Tufano explains,
aims to "build a road between the low-income community and
traditional financialservices firms that don't have an off-ramp
into that community."

D2D (which stands for Doorways to Dreams) relies on the promise
of an innovative program called individual development
accounts (IDAs). "IDAs are like 401(k)s for people without
access to employee savings programs," Tufano notes, "and
they've
proven to be very successful in field tests." The problem,
he explains, is that only ten thousand people in the country have
IDA accounts, out of an estimated forty million eligible families.
Tufano has been working as an advisor on legislation
currently being developed in Washington that would provide matching
funds for education expenses and home purchases for a
million new IDA holders.

But even if that funding comes through - no easy
task, given Washington's post-September 11 spending
priorities - convincing financial institutions that low-income
savers present a viable business opportunity remains a tough challenge.
"You have to get the price per customer per year down sufficiently
low so institutions are willing to handle an account with a few
hundred dollars," Tufano says. To that end, his D2D Fund
has partnered with SunGard, a leading technology firm, to create
back-office and middle-office operations to handle account processing.
"We're pooling the assets of small, low-income consumers
and adapting 401(k) processing machinery to serve them. We're
also working on regulatory clearance with the SEC, so in essence,
we're trying to solve all the hard problems that have kept
financial institutions from stepping up to the plate. Our watchwords
are low cost, portable, scalable, and national."

Tufano has given a number of presentations on this topic over
the last few years, and he admits it's sometimes a little
like
"standing against the wind." "Community organizations
are wary of the concept because it's something new; financial
institutions are worried about losing money; the federal government
is concerned about compliance problems associated with
designing a new system to serve so many people; the lawyers are
worried about SEC regulations," he says, reciting the litany
of objections he has heard all too often. Then, taking a deep
breath, Tufano adds, "There may be a fairly low probability
that we'll help all forty million people with this. But even
if we could reach a fraction of the total, just think of the
potential."

The Neighborhood
Grocer

In addition to the scarcity of financial services, inner-city
residents often face a lack of basic services. Many large
retail stores, for instance, are not interested in launching locations
in urban areas because they are put off by perceptions
of low-income levels and high crime rates.

David Crockett, a post-doctoral research fellow who coteaches
the required MBA ten-session Social Enterprise course, has
studied consumer patterns and attitudes regarding purchasing groceries
in the inner city. As a doctoral student in marketing
at the University of Arizona, Crockett wrote his dissertation
on how residents of the metropolitan Milwaukee area cope with
the lack of large grocery stores in their neighborhoods. "Retailers
tend to think that everyone who lives in the inner city
is poor," he says, "but that simply isn't true.
The average income may be low, but the range in income is high,
as is the
density of the population." Crockett found that while there
was a small group of inner-city residents who were forced to do
all their shopping within their communities, most had ways to
at least occasionally make trips to larger stores that offered
lower prices, greater selection, and fresher produce.

In interviews with inner-city residents, Crockett
learned that those who could shop outside their neighborhoods
were often conflicted about it. "Many felt that not only
was it inconvenient, but it didn't get money circulating
in the neighborhood, and therefore, the neighborhood didn't
get the secondary benefits of capital flow," he says. This
suggests that innercity supermarkets would enjoy a customer base
predisposed to be loyal. Crockett found that when they did shop
at the local, smaller markets, "consumers were forced to
be extra vigilant and inspect their groceries more thoroughly
- checking expiration dates and so forth."

As it happens, a large grocery store chain recently moved into
the neighborhood Crockett studied, and he hopes eventually to
return to Milwaukee to document the impact the new facility is
having on the community. "Clearly, having a good grocery
store
within walking distance will make a big difference in the neighborhood,"
he says.

Investmentsand
Insights

Companies should approach the inner city not as an object opf chartiy, but as an opportunity for learning and business development. - Rosabeth Moss Kanter

Rosabeth Moss Kanter, the School's Ernest L. Arbuckle
Professor of Business Administration, is a noted authority on
business strategy, leadership, and innovation who has studied
the contributions that businesses make to the social sector as
an extension of their strategies.

"Companies should approach the inner city not as an object
of charity, but as an opportunity for learning and business
development," says Kanter, who believes that what she calls
"corporate social innovation" can help revitalize ailing
cities.
In 1998, she conceived and led a national conference on Business
Leadership in the Social Sector (BLSS) to determine how
business resources could help alleviate social-sector problems.
The success of the conference led Kanter to develop a video
series as well as an MBA elective seminar with the same title.

One area where Kanter has seen noteworthy, mutually beneficial
success is in partnerships between corporations and schools.
Bell Atlantic's Project Explore in Union City, New Jersey,
for instance, helped the company find new ways of handling data
transmission and refine its goals for video on demand. In turn,
the project "became a catalyst for increasing the use of
technology to transform middleand high-school classrooms, to improve
students' skills, and to involve parents in their
children's education," observes Kanter, noting enthusiastically
that the partnership helped save Union City schools from
state takeover. IBM's Reinventing Education program has met
with similarly impressive results in collaboration with schools
in 21 U.S. cities and 4 other countries. "Many product innovations,
which benefit both the schools and IBM, have resulted
from this initiative," Kanter stresses.

Kanter has also studied corporations that have successfully launched
welfareto- work programs, including Marriott
International's Pathways to Independence initiative. The
Marriott program trains former welfare recipients and guarantees
them jobs upon completion of their training. "The challenges
of working with the unemployed has led the company to new
insights about training, job placement, and supervision,"
says Kanter. She adds that when United Airlines launched a training
program for inner-city residents, featuring one-on-one mentoring
for new hires, it proved so successful that the company
began to mentor all new hires. "Traditional solutions to
America's recalcitrant social ills amount to little more
than
Band-Aids," says Kanter, who believes that strategic business
investment in inner cities goes much deeper and will produce
"profitable and sustainable change for both sides."
In her latest book, she looks at a number of companies that found
that
community service was a logical extension of their business strategies.
Kanter hopes her research will inspire more companies
to take advantage of the benefits of investing in urban areas.
"The future of our nation really depends on it," she
emphasizes.

Students
and Corporate DNA

We try to build up a tool chest of the skills needed to be able to choose appropriate partners, forge alliances that work over time, and develop an exit strategy. - Diana Barrett

Diana B. Barrett, a senior lecturer at HBS, took over
Kanter's Business Leadership in the Social Sector (BLSS)
seminar last year. A member of the School's Initiative on
Social Enterprise core group, she has spent most of her professional
career to date exploring the applicability of corporate models
to the health-care field as well as other community-based needs.

Barrett has kept Kanter's basic approach to the
course, which, she says, "is to help students understand
how businesses can contribute to new solutions for unmet social
needs and unsolved societal problems." However, with added
materials from Barrett's own research on healthcare management
and social enterprises in developing countries, including Mexico,
Colombia, and India, BLSS has evolved from a seminar into a full
course in the elective MBA curriculum. While the international
perspective has broadened the course, cases specific to challenges
in the inner city - such as Austin's Cleveland turnaround
case and Kanter's case on Marriott's welfare-to-work
program (read more about these cases) -
are still key components.

"Class discussions in this course are particularly invigorating,"
Barrett reports, "in part because we have a significant
number of cross-registrants from the Kennedy School, the School
of Education, and even the Fletcher School at Tufts. These
students often have a very different worldview that they use to
challenge some of the attitudes held by our MBAs."

Throughout the twenty-session BLSS course, students are asked
to examine a range of strategic partnerships that occur when
senior executives in business and social-sector organizations
recognize that their needs can most easily be met by one
another. "We try to build up a tool chest of the skills needed
to be able to choose appropriate partners, forge alliances
that work over time, and develop an exit strategy," notes
Barrett, who this year is introducing some new material on
performance measures. "Suppose your company hires a large
number of people who previously were on welfare, or wires the
computers in a local school system," she posits. "How
do you know when you've been successful? It's not as
if you can track
an increase in market share or see the impact in your bottom line."

Students are also asked to consider how companies reward managers
who spend time building strategic partnerships in the
community. "This kind of activity isn't part of most
people's performance appraisals," Barrett says, "and
that's a definite
barrier to involvement. One of the things we talk about is how
you begin to work this into the DNA of a company, so it's
as
important as any other measures that are applied to employees."

When they leave the course, Barrett hopes students
will take away a realistic understanding of the time, energy,
and human capital required from corporations involved in working
on complex social problems such as inner-city development. "Many
of our students will end up at companies that will be called on
to play a role in societal issues - in the local, national,
or global arena," says Barrett. "I want them to know
how to help a company analyze and address those issues in a thorough,
systematic, and businesslike way. For corporations to make a difference,
that kind of leadership is what it takes."

The
Case for the Inner City

A sampling of case studies related to the
inner city written by HBS faculty.

Bell Atlantic and the Union City Schools
This five-part series examines Bell Atlantic's Technology
in Education partnership with the Union City, New Jersey,
public
schools. The cases include overviews of the changing telecommunications
marketplace, education reform efforts, how Bell
selected Union City, the objectives of both partners, and
outcomes of the partnership.

First Community Bank
A two-part series that presents BankBoston's bank-within-a-bank,
FCB, which was designed to serve urban communities. The
first part discusses issues related to founding FCB and
achieving profitability, while the second details the struggles
of
integration when a new parent company takes over.

IBM's Reinventing Education
This three-part series details IBM's national innovation
strategy to transform public education using the company's
engineers
and outside IT consultants. It discusses IBM's educational
partnerships, including those in Florida, Ohio, California,
Pennsylvania, West Virginia, and Ireland.

National Foundation for Teaching Entrepreneurship
There are two cases on NFTE, a nationally recognized nonprofit
organization for teaching entrepreneurship to disadvantaged
youths. The first case, "Steve Mariotti and NFTE,"
centers on the nonprofit's founder and the challenges
of taking an
organization beyond the founder-dependent, informal start-up
stage of development. A second case on strategic planning
at
NFTE was recently published.

Pathways to Independence: Welfare-to-Work
at Marriott International
This case highlights Marriott's welfareto- work program,
which trained over one thousand people in eight years and
retained
its participants at a rate about 20 percent higher than
the figure for regular hires. The focus of the case is the
feasibility of expanding the program.

Supermarkets in Inner Cities
A study of the challenges and opportunities inherent in
operating supermarkets in inner-city neighborhoods, the
case
emphasizes the importance of cross-institutional collaboration,
the problems of political processes, and the strategies
needed to gain community involvement in inner-city economic
development. This case will soon be updated with a video
component.

The Cleveland Turnaround
This four-part series traces the Cleveland community's
efforts to move the city from economic, social, and political
crisis
in the 1970s through revitalization into the 1990s. Each
case addresses a different aspect of the turnaround: responding
to
the crisis, building on progress, facts and figures, and
challenges for tomorrow.

United Airlines: The Friendly Skies
This video case details how United Airlines committed to
hiring former welfare recipients to meet its need for entry-level
workers and in the process developed an effective mentoring
program that has potential for all United employees.